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Netflix Discs Fund Streaming

23 Jan, 2012 By: Erik Gruenwedel

Netflix’s bullish stance on subscription video-on-demand long has excited technology pundits, analysts and helped drive expectations on Wall Street. It also undermines the service’s core value — by-mail disc rentals — which underscores what could be a very long, unprofitable year.

On the cusp of Netflix’s fourth-quarter financials Jan. 25, the Los Gatos, Calif.-based service is projected by Wedbush Securities analyst Michael Pachter to lose more than 3.6 million disc subscribers in the quarter — or about 8 million to 9 million in the second half of 2011.

In the third quarter, Netflix said nearly 14 million of its 23.8 million subscribers enjoyed the option of renting physical media — including 2.3 million exclusively.

Richard Greenfield with BTIG Research in an Oct. 25 blog reported that Netflix generated about $10.30 in monthly revenue per disc sub, compared with $7.99 per streamer. Indeed, nearly 10 million subscribers opted to exclusively stream in Q3 — a tally that is expected to increase to 12.8 million during Q4.

Meanwhile, Netflix subs choosing discs exclusively and/or with streaming is projected to top 11.6 million in Q4 as more than 3.1 million subs who preferred the option to stream and rent discs departed the service, due to the 60% price increase imposed last fall.

Who can blame them? For the past several years Hastings has steadily beat the drum that disc rentals were unimportant (and by extension its subscribers) to the company’s streaming future.

At the same time, Netflix needs packaged media’s revenue to help roll out its streaming empire, including service launches in the United Kingdom and Ireland this month.

“At this point, it’s a source of profits funding our international [streaming] expansion,” Hastings told analysts last October.

And if disc subs keep leaving, that foreign expansion cost gets incrementally bigger and bigger.

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About the Author: Erik Gruenwedel

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